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Europe faces week of challenges in debt crisis

Sep 4, 2011, 11:08 p.m.
The picture shows the building of the German Federal Constitutional Court Bundesverfassungsgericht in Karlsruhe February 20, 2002. REUTERS/Ralph Orlowski

By Andrew Torchia

LONDON (Reuters) - Europe faces a string of political and legal tests this week that could hurt efforts to resolve its sovereign debt crisis and increase pressure for governments to try more radical solutions.

A court ruling may reduce the freedom of the German government, the biggest contributor to the euro zone's bailout fund, to finance rescues of crisis-hit countries such as Greece.

The European Central Bank, internally split over its bond market intervention to protect Italy, is expected to review the program. And Greece will find out how successful it has been in persuading private investors to take part in a bond swap designed to cut its 340 billion euro debt mountain.

None of these challenges looks likely to doom policymakers' frantic attempts to keep indebted euro zone countries afloat while they try to regain the confidence of financial markets.

But this week's events may underline how vulnerable those attempts are to worsening political currents in the euro zone, and how far the 17-nation bloc remains from finding a lasting solution to the debt crisis.

COURT RULING

On Wednesday morning, Germany's Federal Constitutional Court will deliver its ruling -- awaited for over a year -- on suits claiming Berlin is breaking German law and European treaties by contributing to multi-billion euro bailouts of Greece, Ireland and Portugal.

Legal experts think the court is highly unlikely to block the contributions altogether. But it is expected to give the German parliament a bigger say in approving them.

With German public opinion turning against providing more aid to Europe -- a survey published last week suggested two-thirds of Germans think parliament should not ratify more money for the bailout fund -- that could be a dangerous concession. At the very least, it might further slow and complicate Berlin's responses to the debt crisis.

It could also encourage parliamentary opposition to bailouts in other disillusioned euro zone states. In Slovakia on Sunday the head of a junior party in the ruling coalition said the Slovak parliament would not vote on expanding the powers of the regional bailout fund, the European Financial Stability Facility, before December at the earliest.

Euro zone officials have been hoping national parliaments around the bloc will finish approving the EFSF reforms by early October. The threatened delay in tiny Slovakia may not be disastrous -- diplomatic pressure may be put on Bratislava to speed up approval, or a legal subterfuge found for the EFSF to use its new powers pending Slovak approval -- but it underlines how the bloc's crisis plans rest on shaky political ground.

Politics have also turned ugly in some of the euro zone countries which need aid. The ECB's monthly policy meeting will grapple with this on Thursday as it debates how to handle Italy.

Early last month, the ECB's 23-member Governing Council decided to begin buying Italian government bonds to prevent a disastrous jump of their yields, overriding the opposition of a small minority of council members who felt this compromised the central bank's monetary policy.

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